The USD/CAD currency pair has shown extraordinary strength in the past few days. It is holding firm a little under the important resistance level of 1.39444. This level happens to be the 61.8% Fibonacci retracement from the September-February rally, making it an important inflection point for traders. Markets are still digesting Canada’s recent mixed inflation print. According to this, USD/CAD is caught between the 10-day Simple Moving Average (SMA) at 1.3941 and the 200-day SMA at 1.4025.
We believe the current price action is indicative of overall uncertainty in the market, playing out on an overall bearish stage for the USD/CAD pair. Recent Canadian CPI data figures have added to that uncertainty. Traders are already trying to price in what these numbers will mean for future monetary policy actions taken by the Bank of Canada (BoC).
Key Resistance and Support Levels
1.39444 resistance level holds the key, making it a must-watch for USD/CAD traders. This level stands out as an exceptionally important Fibonacci retracement level. It serves as a huge psychological barrier, dictating bulls’ and bears’ moves to drive future price actions in coming weeks at least. If USD/CAD clears above this weekly resistance and closes firmly, it would confirm upside potential. If this move were to materialise, it would likely eye the 200-day SMA at 1.4025 and the mid-point of the previous rally at 1.41066.
If the two are unable to maintain upward movement beyond this barrier, it may result in a retreat. Further support is found at the 2 November low of 1.3823. Traders have been closely watching these levels. A move below 1.3823 would confirm a barrage of bearish sentiment and take the Euro further into support on the 78.6% Fibonacci level near 1.37136. Even a further decline would then only bring the levels down to 1.36475.
Market Reaction to Inflation Data
Canada’s recent CPI data has created a murky picture that will go a long way in shaping future moves or lack thereof by the BoC. Perhaps more important, year-on-year core CPI jumped to 2.5%, from 2.2% in March, reflecting broad, underlying inflation pressures. As of April, headline CPI was up to 1.7%. While this was above the consensus of 1.6%, it was still below the 2.3% seen in March.
Differing and conflicting inflation data increases uncertainty. This ambiguity has a direct impact on the Bank of Canada’s plans for future interest rates and larger monetary policy direction. Some analysts are cautioning that ongoing high inflation might force even more aggressive monetary policy. More modest inflation data could push for a looser hand.
In Canada, the value of our Canadian dollar is very much tied to global oil prices. This is the case because petroleum is by far Canada’s largest export commodity. Fluctuations in oil prices can have immediate effects on the CAD, adding another layer of complexity for traders as they navigate the current market environment.
Broader Economic Context
The state of the US economy is the biggest driver of USD/CAD dynamics. As Canada’s largest trading partner, the US has an economy that literally shakes the ground in Canada. This is especially true for economic indicators from the United States, which can have a direct effect on the loonie, considering how closely tied the two economies are. Both countries continue to chart complicated economic waters. For their part, USD/CAD traders are keeping one eye fixed on developments on either side of the border.
Despite the short-term indecision reflected in current price movements, traders await signals from both technical levels and economic data releases to inform their next steps. The ongoing fluctuations in oil prices, coupled with mixed inflation data from Canada and broader economic trends in the US, contribute to a complex trading environment for USD/CAD.